America's economic woes: Why jobs are scarce, wages low and government can't help

By Dr. Peter Morici web posted July 14, 2014

Americans keep hoping for a robust recovery -- one that delivers better paying jobs and decent returns on retirement savings. Changes in technology and the economy may require that never happens, and government efforts to improve conditions often multiply the misery.

In 1908, Henry Ford had a great idea -- the Model T -- and a novel understanding of mass production— but needed huge amounts of capital to build factories, establish dealers to sell and service mass-produced cars, and a large corps of managers and assembly workers.

His success inspired competitors and whole new industries making everything from agricultural implements to zippers. For three generations, those created enormous demand for capital and jobs for millions in manufacturing and supporting services.

In the closing decades of the 20th century, rapidly-advancing digital technologies helped those industries use factories more efficiently and slash the numbers of managers and assembly workers.

Most digital companies never had quite the same appetite for capital and workers.

Google was founded with $100,000 in seed capital in 1998, and $25 million in funding a year later. Within five years, its search engine was available to virtually every computer user around the world, and its brand was more ubiquitous than Coca Cola.

Google's outstanding stock is worth about $370 billion -- more than five times Ford -- and it has accomplished this remarkable wealth creation on a relatively small initial investment. Today it has about 50,000 high-skilled employees—that's less than one-fourth of the Ford workforce, which has been significantly downsized in recent decades.

Older enterprises like Ford and younger ones like Google that form the manufacturing and technology economy of the 21st century need more tech-savvy workers than universities and community colleges provide. However, even if enough liberal arts and business programs could retool to produce all the science, math, technology and engineering graduates needed, the remaining programs would still produce many more non-STEM graduates than the economy could absorb.

Similarly innovators often don't need a lot of money to create valuable new enterprises or expand established businesses. Consider that many young people create profitable apps and marketing platforms on their laptops, and major corporations are flush with billions in cash and too few opportunities to deploy it.

Consequently, established companies and individual investors bid up prices for young enterprises, whose owners wish to cash in on their initial success, and pay astronomical sums for the initial public offerings of companies like Facebook. They bid up prices for stocks, bonds, and collectables, and drive down yields on dividend-paying stocks and interest rates on bonds and CDs.

To generate enough jobs, the economy must create lots of service businesses beyond the ecosystems of manufacturing and technology -- everything from restaurants to retirement homes, but government regulations dictating wages, sick leave and health benefits drive many services offshore. That's why credit card call centers and even some back office legal services are in Asia.

Those centers throw millions of less-skilled Americans out of work, slow economic growth, and further reduce college graduates' wages and returns on savings and investments.

Too many subsidized loans to send 60 percent of high school graduates to college merely drives up tuition and worsens the glut of graduates and leave young people saddled with debt.

Since 2008, the Federal Reserve has pumped more than $3 trillion dollars into the economy with too few good results. It's not responding to a shortage of capital but it is further driving up asset prices and pushing down the returns on saving and investing.

What most Americans won't accept, and politicians lack courage to admit, is the government can't broadly raise wages or spur growth by regulating prices, mandating health care benefits, over subsidizing education, and printing money but it can make most folks a lot worse off by trying.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, a widely published columnist and five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1